Netflix has exceeded analysts' estimates 31 times in the past nine years. It has now passed the 50 million subscriber threshold and could well continue to grow at a stirring pace. But a corollary of faster growth is that while it gives you more heft with which to challenge current or incipient competitors, it puts you on the radar screen of those who are even larger. Among the effects this has is that it draws more attention to the enterprise's strengths and weaknesses by entities which may be even better endowed - and changes expectation of performance.
Netflix, as the following article explains, has enjoyed a 400 percent increase in its stock price in the last year. But it is also locked in a struggle with cable providers over whose pipes its content is carried. The cable guys argue that Netflix sucks up a lot of bandwidth and should pay more for the privilege, while Netflix pleads net neutrality and the mutual benefits of customer satisfaction. The reality is that Netflix and the cable networks will do what they perceive is right for them, but with an eye towards the day when, inevitably, they become direct competitors. Investors, meanwhile, will no longer view Netflix as a scrappy digital startup but as a full fledged media conglomerate - and their expectations will reflect that change. JL
Spencer Jakab reports in the Wall Street Journal:
While its business model is no house of cards, it may be time to curb your enthusiasm.
Orange may be the new black, but Netflix Inc. remains a far cry from being the new HBO.Investors in the streaming-video service who watched its share price rise nearly 400% since the start of 2013 got an additional boost from news of a (rejected) takeover offer for HBO's parent, Time Warner Inc. Based on an implied value of some $20 billion for HBO, Netflix's $26.5 billion market capitalization doesn't seem that silly.Except it is, and another blowout second-quarter earnings won't change that. In fact, a big beat would be par for the course: Since 2005, Netflix has exceeded analysts' estimates 31 times, by 44% on average. In the latest quarter, analysts project earnings of $1.14 a share, against 49 cents a year earlier.At the end of 2013, Netflix had about 10% more subscribers than HBO domestically and almost 40% as many globally. With several new markets and its ability to reach customers directly, Netflix is growing far more quickly, too.But age is catching up to Netflix. For one, spending on content is growing rapidly. The company expects this to hit about $3 billion this year, with less than 10% going on original programming. The latter must rise quickly to retain customers, though.More pertinent is how Netflix will reach all those subscribers. It charges U.S. customers a little more than half as much as HBO, but the latter splits that subscription with cable operators. Netflix pays far less for enhanced access to viewers. But, taking up around a third of U.S. Internet capacity during peak viewing hours, its nearly free ride is unlikely to last.Meanwhile, HBO itself is delivering content through the Internet along with several competitors, most notably Amazon.com Inc. That will put more pressure on Netflix to buy and produce expensive content.In short, the more Netflix begins to look like HBO, and vice versa, the more it should be valued in the same way—like a regular media company. Yet, at 106 times 2014 earnings—and more than 40 times 2016 forecasts—its shares look rich even after extrapolating rapid growth through the end of this decade.While its business model is no house of cards, it may be time to curb your enthusiasm.
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